2023-12-18 18:33:55
Stock marketers usually value free markets. Hungary’s right-wing populist government is betting on the illiberal card. Nevertheless, investors seem to appreciate their price. At least when you look at the capital market, that’s the impression you get. The ongoing quarrels with the EU apparently have little impact on the Budapest floor. The small Central European country brings shareholders strong profits. Last year, the leading index BUX not only outperformed many markets in the region, but also Western stock market barometers.
Michaela Seiser
Economic correspondent for Austria and Hungary based in Vienna.
Investors are occasionally demanding an additional risk premium, which is linked to the EU dispute over ensuring the rule of law and combating corruption. But the risk premiums on Hungarian assets were manageable and can hardly be identified at the moment, says Stephan Imre, analyst at Raiffeisen Bank International (RBI). All major rating agencies and other market observers had consistently assumed that Hungary would receive at least some of the EU funds this year, which supported investor confidence and limited additional risk premiums.
Largest recipient of EU money
Hungary is one of the largest recipients of EU money, which is why the default should have serious consequences. Meanwhile, Prime Minister Viktor Orbán’s cabinet has made important legal changes requested by the EU. It looks like €13 billion of the €22 billion from the Cohesion Fund will be released, which would support growth next year. The release of EU funds should have a positive impact on Hungarian assets due to potentially higher growth, believes Erste Group analyst Henning Eßkuchen.
Inflation is also likely to stabilize. It was particularly high in Hungary last year at 17 percent compared to the EU. Accordingly, analysts expect a further cut in the key interest rate from currently 11.5 percent. RBI sees the key interest rate at 7 percent for the middle of next year and 6 percent for the end of 2024.
This plays into the hands of shareholders. Titles with a favorable rating can score points both in historical and regional comparison. Ukraine’s neighboring country is surprisingly unaffected by the stigmatization of being a market close to Russia. Finally, BUX heavyweights OTP, Mol and Richter are heavily involved in Russia.
Monetary and economic policy are drifting apart
A drifting apart between monetary policy on the one hand and financial and economic policy on the other has had a negative impact in recent months. Analyst Imre from the RBI defends the central bank’s criticism when she identifies the pro-cyclical economic policy and price caps as the reasons for the excessive inflation. The high price inflation also counteracts real economic growth. In this context, the idea of strengthening competitiveness makes sense because it could fundamentally have an anti-inflationary effect.
But Finance Minister Mihály Varga is also right to denounce the central bank’s premature announcement of the end of interest rate increases in September 2022, says Imre. The monetary authorities are accused of a devastating communication error. This led to a speculative attack on the national currency, the forint. Since Orbán returned to power in 2010, the forint has lost around a third of its value against the euro. Its weakening accelerated in 2022 as record pre-election spending fueled an EU-wide price rise, while emergency monetary measures undermined investor confidence.
The forint is weak
From Commerzbank’s perspective, the forint’s below-average performance compared to the other currencies in the region will continue, although there could be a slight recovery in the first half of 2024 if the inflation rate falls more significantly. In the medium term, however, there is a risk that Hungarian core inflation will remain above that of Poland and the Czech Republic, predicts Tatha Ghose from Commerzbank. In addition, the euro is expected to fall again. These are both negative factors for the forint.
Moody’s recently affirmed Hungary’s Baa2 rating and maintained a stable outlook. It was the second review of Hungary this year by the American rating agency. In its report, Moody’s highlights Hungary’s medium-term economic growth potential, which could be based on the labor market and improving productivity, as Hungary’s strength. The country also has one of the lowest corporate tax rates in Europe. The New York-based institute expects Hungary will gradually gain access to EU funds and the delay will have only a modest impact on wealth growth. These factors continue to make Hungary an attractive investment destination, argues the rating agency.
Michaela Seiser, Vienna Published/Updated: , Recommendations: 3 Stephan Löwenstein, Vienna Published/Updated: Recommendations: 61 A comment from Michael Hanfeld Published/Updated: Recommendations: 38
RBI recommends Magyar Telekom and Bank OTP. Erste Group also sees OTP in good shape after its recent acquisitions. Erste Group also recognizes an increase in profitability at the telecommunications service provider MTEL. Inflation will allow the company to significantly increase prices at the beginning of 2024. It will be able to do this as main rivals 4iG and Yettel are likely to make the same move. Likewise, at the traditional pharmaceutical specialist Richter Gedeon, profits are likely to receive impetus from the renewed drug portfolio, while the blockbuster cariprazine received a growth spurt in America a year ago due to the expansion of therapy. After the weaker past year, growth is likely to return in the next twelve months.
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